Banks are struggling to handle a massive surge of applications for loans aimed at helping small businesses keep workers on staff and pay other bills as the coronavirus pandemic takes a growing toll on the economy.
How quickly the loans — which are forgivable if a small businesses retains its workers – can be disbursed is likely to determine what portion of the firms can survive the crisis, which has shut down restaurants, stores and other Main Street concerns across the country.
The Federal Reserve, meanwhile, said Monday that it’s creating a program to purchase the loans, which should make billions of dollars in additional funds available to banks.
The Treasury Department and Small Business Administration allowed firms with less than 500 employees to start applying for the loans on Friday, but the early rollout has been marred by confusion, technical glitches and banks’ own loan volume limits.
“Every bank has got to figure out pretty quickly how to process them, how to prioritize them and how much of their balance sheet to allocate to them,” says Ami Kassar, CEO of MultiFunding, a small business loan advisor.
The $2.2 trillion CARES Act, passed by Congress late last month, provides $349 billion in loans that are guaranteed by the Small Business Administration. A firm can apply for a loan of up to $10 million to cover payroll and other expenses. If the business keeps its staff – or rehires any laid-off employees – eight weeks of the costs are forgiven. The loans require no collateral and carry just a 1% interest rate.
The system was set up with breathtaking speed, just a week after the legislation was passed.
Wells Fargo says it already has reached the $10 billion in loan requests it can handle under a cap imposed by the Federal Reserve because of the company’s creation of millions of fake accounts between 2002 and 2016.
“While we are actively working to create balance sheet capacity to lend, we are limited in our ongoing ability to use our strong capital and liquidity position to extend additional credit,” Wells Fargo CEO Charlie Scharf said in a statement.
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Bank of America says it has received 183,000 applications for more than $33 billion in loans. To be eligible, however, the business must have an existing checking account with the bank and be an existing borrower. Alternatively, the business can simply have a checking account as long as it doesn’t have a credit relationship with another bank.
Bank of America is taking applications on its website and then sending them to the SBA.
Smaller community banks face bigger technical hurdles, according to the Independent Community Bankers of America. Many simply refer small businesses to the SBA website to apply. The SBA system, in turn, is getting overloaded, says ICBA CEO Rebecca Romero Rainey.
On Monday, “It just completely shut down,” she says. “The challenge is with the incredible amount of volume going through the system all at once.”
Also, she says, many banks that don’t have an existing relationship with the SBA have not yet received passwords to access the agency’s system.
While the loans are guaranteed and theoretically entail no risk for banks, many banks are still struggling with how much of their portfolios to devote to the SBA program, Kassar says. Under the new Fed initiative, banks will be able to sell the loans to the Fed, removing them from their balance sheets. The Fed facility will also provide a fresh funding source for banks that may have limited cash for the loans, Rainey says.
Kassar reckons it could take a few weeks for the kinks to be worked out of the SBA program. That’s manageable for many businesses but could be a problem for many with fewer than five employees, whose cash reserves are likely to last just several weeks, Kassar says.
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